There is no such thing as investing in the equities markets without assuming risk. Sometimes the risks are high, sometimes they are marginal. But, one characteristic is consistent: there is always risk.

Here are the four biggest ones we see in the global equities markets today, looking ahead for the balance of 2017:

  1. Valuations + Earnings Disappointments – the forward P/E on the S&P 500 is hovering around 18x, which is a fairly rich valuation but not overly expensive. You could say it’s ‘teetering’ on expensive. The case for higher multiples, in my view, relies on earnings growth keeping pace with rising stock prices. If earnings are growing firmly and convincingly, I think we could see a market trading at 20 to 22x earnings. That would imply a solid year for domestic stocks. The risk here, however, is that earnings miss the mark and disappoint. There are a lot of high expectations baked into prices right now, and business confidence and consumer confidence levels are up. If earnings end up falling short or there is a dent in profits unexpectedly, that could push us into ‘overvalued’ territory.
  2. Geopolitical Shock – maintaining geopolitical order is a constant chess match, and a very delicate one at that. North Korea appears to have quickly become a much more imminent concern than the Syrian conflict, and the way forward remains a big question mark – especially considering there is no apparent medium or long-term strategy for handling the issue. North Korea has been a problem for years and years now, across multiple administrations – with no one solving it. The sense however is that with every day that passes, North Korea’s nuclear capabilities advance. That creates ongoing uncertainty. An “out-of-nowhere” geopolitical crisis would be a negative for markets, in my opinion, especially considering that alliances are shaky as developed countries start to tilt towards pursuing their own individual interests.
  3. The European Union – the European Union needs a win, and I think it could come from a couple or few quarters of convincing 1+% GDP growth with close to 2% inflation. I see it as very possible in 2017, which would help the case for keeping the currency bloc in place and would tamper down anti-EU sentiment. As the European Union negotiates with Britain for leaving, I actually believe that tough terms and a somewhat ugly battle could be a positive – it would discourage other countries from following suit and actually strengthen the union in the process. Anything to the contrary that happens and gives strength to the “leave Europe” case would be negative for global markets, in my view.
  4. S. Politics – this risk mostly has to do with the Trump administration’s ability to advance their economic agenda. The market appears to have priced-in the possibility of major tax and regulatory reform, and to the extent that the administration fails to make major gains on both fronts the market may respond adversely. I think market participants largely understand that advancing legislation is likely to be a difficult and long road, so there may not be a huge expectation that changes happen quickly. But, there is an expectation that they will happen, in my view. Stumbling blocks in Congress are likely to be viewed in a negative light as we move forward.

Manage Risk with Diversification

Investors of all stripes and investment objectives should consider the value of having a diversified portfolio. To see what asset allocation and underlying investments Zacks Investment Management would recommend for you, give one of our Investment Adviser Representatives a call to discuss your objectives and needs at 312-265-9312. We’ll do the rest.

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